India ETFs Tumble on Slack GDP Outlook
Equity-based ETFs tracking India, Asia's third-largest economy, are mostly lower today after the country's statistics ministry said GDP there would grow by just five percent for the fiscal year ending March 31.
That is well below growth of 6.2 percent seen in the previous fiscal year and a far cry from growth of nine percent or more seen in the go-go days of 2011.
Shares of the WisdomTree India Earnings ETF (NYSE: EPI), the largest India ETF by assets, are off 1.6 percent while rival funds such as the PowerShares India Portfolio (NYSE: PIN) and the iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY) are lower by 1.2 percent and 1.4 percent, respectively.
In December, the Reserve Bank of India forecast GDP growth of 5.5 percent while the country's finance growth estimated growth would come in at 5.8 percent.
News of slower growth comes at a time when India ETFs are arguably at a crossroads of sorts. Broadly speaking, India ETFs outperformed the emerging markets universe in 2012, but that out-performance has Indian equities looking pricey relative to other developing world stocks.
The P/E ratio on the benchmark BSE Sensex 30 Index is above 16, according to WisdomTree data. Already vulnerable India small-caps appear to be feeling the pinch of the lower growth outlook as well. Shares of the EGShares India Small-Cap ETF (NYSE: SCIN) are off 1.5 percent Thursday while the Market Vectors India Small-Cap ETF (NYSE: SCIF) is lower by 2.6 percent.
Including today's loss, SCIF is down nearly eight percent year-to-date, indicating Indian small-caps have lagged their large-cap brethren to start the new year.
Some familiar catalysts appear to be weighing on India's growth prospects. While the Indian government enacted a series of reforms in late 2012, including opening the country's insurance and retail sectors to more foreign investment, the country still faces a significant infrastructure problem.
Economists say India's slowdown is largely driven by the country's slow pace of infrastructure development because of bureaucratic hurdles and policies unfriendly to business, according to the Wall Street Journal.
Perhaps not surprisingly, the EGShares India Infrastructure ETF (NYSE: INXX) is down 2.1 percent today, extending the ETF's year-to-date loss above seven percent.
In the past year, INXX has tumbled nearly 10 percent as India's infrastructure woes have been viewed by market participants as a threat to growth there and a potential reason for the country to lose its already tenuous hold on its investment-grade credit rating.
Indicating that India has a long way to catch up to China in terms of making domestic infrastructure a priority, the EGShares China Infrastructure ETF (NYSE: CHXX) has gained more than 12 percent in the past year.
Despite today's glum news, all is not lost for India and the aforementioned ETFs. Citing increased domestic demand and government reforms, Goldman Sachs forecast 2013 Indian GDP growth of 6.5 percent last November and some portfolio managers still see opportunity there.
"Potential upside surprises could develop as politicians position themselves for the 2014 elections. After a frustrating series of false starts and missteps, politicians may finally come together to push through structural reforms. We believe even minor steps in this direction could have a significant impact on investor sentiment and tolerance for risk," WisdomTree Portfolio Manager Rick Harper said in a note.
"While it is still far too early to call 2013 a victory for investors with exposure to India, a series of positive developments have primed the pump for positive performance. With some stimulative policy from the RBI and a generally positive outlook for emerging markets in Asia, we believe India has the potential to be a solid performer in 2013."
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